Air Canada (TSX:AC) has been one of the TSX’s hottest stocks of late, climbing more than 30% in just the past three months. Despite the challenges the airline is facing with travel down and the coronavirus pandemic keeping people at home, many investors are optimistic that buying low today could lead to long-term gains down the road. Billionaire investor Warren Buffett owned airline stocks earlier this year, and so Air Canada could potentially be an investment he’d consider. Let’s take a look at why or why not he might invest in the top Canadian airline stock.
Why Air Canada would be a fit for Buffett’s portfolio
Before the coronavirus pandemic, Buffett’s company Berkshire Hathaway held positions in many top U.S. airline stocks, including United Airlines, American Airlines, Southwest Airlines, and Delta Airlines. He’s generally bullish on the economy — in particular, on the U.S. one — and that’s one of the reasons investors today may be optimistic on airline stocks as well: as the economy recovers, so too will the airline industry. If businesses are doing well, then they’ll likely be busy traveling and flying all over the world, meeting with clients and exploring new opportunities.
And as a value investor, Buffett also likes his bargains. Although Air Canada stock has been rallying in recent months at around $24 per share, the stock is still less than half of the $50 it was trading at earlier in the year before COVID-19 hit. With shares of Air Canada trading at a forward price-to-earnings multiple of just eight, the stock is also a cheap buy given the potential profit the company may generate next year (although that’s a big if given the uncertainty that lies ahead for the economy).
With the stock at a cheap price and this being a good way to bet on the economy, it’s not hard to see why Buffett might feel bullish on the airline stock today.
Why Buffett might not buy Air Canada stock
However, despite Buffett’s optimism for an economic recovery, Berkshire Hathaway sold off its positions in the airline industry earlier this year, not long after the pandemic became a big headache for investors everywhere. The problem is that a full recovery in the airline industry could be years away from happening. Even though things in the economy may get back to normal within a few years, some trends may be here to stay, such as greater videoconferencing, and the demand for air travel may not be as high as it was before the pandemic.
With a long path still ahead for Air Canada before it gets back where it was before COVID-19, there are still many question marks around the business, and that could keep the billionaire investor from taking a chance on the airline.
When Air Canada stock was trading at around $15 or less, it arguably could have been at too cheap of a price to pass up. But now, with the stock close to $24, it simply may not be enough of a bargain for a deal hunter like Buffett to want to invest in Air Canada. Given that Berkshire Hathaway dumped its U.S. airline holdings, it seems unlikely they’d be looking at any other airliner anytime soon, and Air Canada’s stock price may not be low enough to justify an investment given the amount of risk involved.
Motley Fool Canada's market-beating team has just released a new FREE report that gives our three recommendations for the Next Gen Revolution.
Click on the link below for our stock recommendations that we believe could battle Netflix for entertainment dominance.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines.